Tax proposal shifts pain

From wealthy big-city enclaves to middle-income Downstate communities, homeowners would see a 20 percent increase on average in their combined property and state income tax bills if Illinois overhauls how it pays for public schools, a Tribune computer analysis of tax data shows.

The state Senate is poised to vote this week on a proposed $5.8 billion plan to raise Illinois' state income tax rate to 5 percent, from 3 percent, and use a portion of the extra revenue to help homeowners pay their school taxes. Overall, state aid to public schools would rise, reducing heavy reliance on local property taxes that create disparities between wealthy and poor districts.

If the reforms become law, a long shot given Gov. Rod Blagojevich's opposition to raising taxes, residents would be affected depending on their school district, how much they earn and how much they pay in state income and local school taxes.

For example, affluent homeowners in Chicago's Loop could expect a combined tax hike of 40 percent or more, while property owners in trendy city neighborhoods and North Shore communities could see increases of more than 25 percent, the analysis found.

Homeowners in Chicago's suburbs would take less of a hit if the tax reforms take effect, the Tribune found, while well-to-do-singles who don't own homes--and wouldn't receive a property tax cut--would see tax increases of more than 50 percent. To partially offset those increases, the legislation establishes a new so-called "renter's credit" of $30.

Despite Blagojevich's opposition, the Senate is hoping to garner enough votes to override a veto and persuade the state House to take up the matter.

Senate President Emil Jones of Chicago is backing the effort, establishing a select Senate committee to undertake a tax overhaul. But House Speaker Michael Madigan, also of Chicago, has not taken a position on the legislation, a spokesman said. Both chambers need to approve the bill before it can go to the governor.

Illinois has not seriously considered such dramatic tax reforms since 1997, when then-Gov. Jim Edgar unsuccessfully tried to cut property taxes and raise income taxes to fund schools.

Since then, school funding disparities have widened and voters largely have refused to back school tax increases. Supporters of the reforms argue that Illinois needs to fix a beleaguered school finance system that shortchanges poor minority students.

But opponents say the proposed tax increases are too onerous. A family with a net income of $100,000 now has a $3,000 state income tax bill, compared with $5,000 if the reforms go through, a 66 percent tax hike.

Sen. James Meeks, an Independent from Calumet City who is the chief sponsor of the tax reform legislation, said Illinois has a responsibility to help its most-disadvantaged students.

"You have to care about people who are at the bottom," said Meeks, who represents some of the poorest communities in Cook County. "We have to care. This is America. This is a society based on compassion and caring."

The Tribune reviewed information from 5.2 million Illinois individual tax returns filed in 2004 to determine the impact of the proposed tax policy shift.

To comply with confidentiality laws protecting individual taxpayer information, the Illinois Department of Revenue released total state income and local property tax information by ZIP code, excluding ZIP codes with fewer than 50 returns.

The Tribune calculated average income and property tax figures for filers in some 1,300 ZIP codes and much more would residents would pay if the reforms took effect.

The analysis focused more closely on 2.3 million tax returns for property owners.

Averages across ZIP codes do not reflect individual circumstances. And taxpayers also must keep in mind that state tax changes would affect federal returns as well, because federal filers who itemize receive deductions for both state income and local property taxes.

The legislation calls for the state to set up a "Property Tax Relief Fund," that would cover a portion of homeowners' school tax bills. The percent of local tax bills devoted to schools varies throughout the state, which affects how much relief homeowners would receive.

The Tribune used county averages provided by the Revenue Department to calculate the portion of tax bills set aside for schools in each ZIP code.

Under the proposal, next year the relief grants would equal 30 percent of total property taxes levied in the 2001 tax year. But because property taxes have increased since then, property owners could expect to see about a 25 percent reduction in school taxes on next year's bills, according to state Revenue Department estimates.

The Tribune's analysis shows that the property tax breaks won't offset the income tax hike for homeowners across the state.

On average, homeowners would see an increase in their combined property and income taxes. The lowest increase was 6.62 percent, for filers in a Waukegan ZIP code in Lake County; the highest increases were more than 40 percent, for two ZIP codes in the Loop and for some Downstate ZIP codes.

The Tribune found that tax filers Downstate--where school districts typically receive more in state aid--would be hurt by their relatively low school property tax bills. Under the reforms, the less paid for school property taxes, the less relief provided to offset the income tax increase.

For example, only 45 percent of property taxes on average go toward schools in Pulaski County, at the southern tip of Illinois. In contrast, an average of 68 percent of property taxes in DuPage County flows to schools.

Filers in DuPage ZIP codes would see an increase in combined property and income taxes of about 16.2 percent, according to the analysis. In fact, all suburban Chicago counties fared better than Downstate counties as whole, which would average a 21.5 increase in taxes if the reforms go through. Filers in Will County ZIP codes would see the lowest increase in the six-county Chicago area--an average of 14.2 percent.

The reforms also double the education credit allowed for private school tuition and public school fees, but taking that credit into account didn't substantially change the tax increases for homeowners across ZIP codes, the Tribune found.

In addition, the legislation would quadruple the earned income credit that low-income working families can receive on their state returns. That would be a big break, but the ZIP code data indicate that most homeowners would not be eligible for the credit based on average income.

The reforms would pour $1.7 billion into public schools, increasing basic per-student aid to $6,100 per student, from $4,964.

But school districts wouldn't receive the extra money until 2006-07, according to the legislation.

That may not be soon enough for deficit-ridden districts.

On Wednesday, busloads of school reform advocates are expected to descend on Springfield to rally for tax reform and more funding for public schools.

The most recent figures from the Illinois State Board of Education show school districts statewide spent $1.43 billion more than they collected in 2003-04, forcing them to borrow money, dig into reserves and cut staff and programs to staunch the red ink.

Blagojevich, who has increased school funding during his tenure, has pointed out that school finances have improved. In fact, the statewide school deficit is smaller than the $2.3 billion deficit posted in 2002-03.

Elliot Regenstein, the governor's chief education aide, said Blagojevich believes the school finance system is too reliant on local property taxes.

At the same time, "We don't want to increases taxes on the working families of Illinois," Regenstein said.

Despite school funding increases, state board figures also show the state contributed about 30 percent of total education dollars spent by school districts, compared with 62 percent contributed by local taxpayers and 8 percent paid by the federal government.

With local residents loathe to raise education taxes--some 68 percent of school tax referendum proposals failed this spring--advocates say it's time for the state to pick up a larger share of education funding.

Nationally, Illinois ranks near the bottom for its contribution to funding public schools.

"There's a crisis, a financial and academic crisis that is hitting school districts across the state, in all geographic areas. It's no longer a Chicago and south Cook issue [districts with high poverty], it's an issue in collar counties, and rural communities Downstate," said Bindu Batchu, manager for the A+ Illinois campaign to reform public school funding.

Critics say pumping more money into schools may not solve the problems inherent in Illinois' school finance system.

"You can't ignore the disparities [between wealthy and poor districts] but we can't assume disparity is the whole problem," said Michael Van Winkle, an analyst at the conservative Illinois Policy Institute. Some low-spending districts still have high test scores, he noted.

Jeff Mays, president of the Illinois Business RoundTable, said if the state is going to raise taxes for schools, it also should make sure the extra money is spent wisely.

"If we have goals in education, we ought to make sure we're moving toward them," Mays said. The legislation also would raise the corporate income tax to 8 percent, from 4.8 percent, as well as provide business property tax relief.

"I want to make sure that whatever taxes we're raising can be justified and sustainable," May said. "I want them attached to the goals this state embraces."

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How proposed state tax reforms would affect property owners

A proposal to raise state income taxes from 3 percent to 5 percent and lower property taxes by about 30 percent* in 2006 would on average increase taxes for homeowners in the six-county area. Those in the Chicago and suburban lakefront areas would see the largest hikes.

Percent increase by ZIP code

For six-county area, largest and smallest increases highlighted

KEY

6-10%

10-15%

15.1-20%

21.1-25%

More than 25%

COOK COUNTY

Largest: 60604

(Chicago) +43%

Smallest: 60804

(Cicero) +8%

DUPAGE COUNTY

Largest: 60521

(Hinsdale) +28%

Smallest: 60139

(Glendale Heights) +9%

KANE COUNTY

Smallest: 60123

(Elgin) +12%

Largest: 60554

(Sugar Grove) +20%

LAKE COUNTY

Smallest: 60085

(Waukegan) +7%

Largest: 60045

(Lake Forest) +29%

McHENRY COUNTY

Largest: 60010

(Barrington) +25%

Smallest: 60142

(Huntley) +10%

WILL COUNTY

Smallest: 60441

(Lockport) +12%

Largest: 60481

(Wilmington) +19%

Averages for six-county area

Increase by county

COOK Net income $85,035.17 Current income tax $2,551.06 New income tax $4,251.76 Current property tax $3,522.10 New property tax $3,042.13 Current income + property tax $6,073.16 New income + property tax $7,293.89 Percent increase 20.1% DUPAGE Net income $100,917.86 Current income tax $3,027.56 New income tax $5,045.94 Current property tax $4,615.98 New property tax $3,834.27 Current income + property tax $7,643.54 New income + property tax $8,880.21 Percent increase 16.2% KANE Net income $81,230.62 Current income tax $2,436.92 New income tax $4,061.53 Current property tax $4,171.28 New property tax $3,535.68 Current income + property tax $6,608.20 New income + property tax $7,597.22 Percent increase 15.0% LAKE Net income $126,556.74 Current income tax $3,796.70 New income tax $6,327.84 Current property tax $5,718.88 New property tax $4,798.14 Current income + property tax $9,515.58 New income + property tax $11,125.98 Percent increase 16.9% McHENRY Net income $102,919.87 Current income tax $3,087.60 New income tax $5,145.99 Current property tax $4,823.62 New property tax $4,050.87 Current income + property tax $7,911.21 New income + property tax $9,196.87 Percent increase 16.2% WILL Net income $70,278.76 Current income tax $2,108.36 New income tax $3,513.94 Current property tax $3,649.64 New property tax $3,062.96 Current income + property tax $5,758.01 New income + property tax $6,576.90 Percent increase 14.2%

WORKSHEET Illinois Individual Income Tax Return for 2004 Line 13 (Net income) $ A New income tax rate x.05 New income tax before any credits $ B

County real estate tax paid in 2004 (for 2003 taxes)

Add up the taxes on your real estate bill for any grade school, high school and unit district

Total school taxes =$ C Multiply that amount by 25 percent* x.25 Amount state pays in new plan $ D Subtract line D from your total property taxes, this is your new real estate tax $ E

New tax you would pay

Add up the new income tax amount with the new and reduced total property tax bill. Compare that to your old property tax bill, without any school tax reductions, and your old income tax amount on Line 15 of the tax form.

New income tax before any credits $ B New and reduced property tax bill +$ E New tax burden =$

For a more precise figure, factor in credits. Some of those would change in 2007 and could affect you. The education credit would double -- from 25 percent to 50 percent of qualified expenses up to $1,000; and the earned income credit would quadruple, from 5 percent to 20 percent of your federal earned income tax credit.

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